Innovation: far and wide – Nationwide’s Mark Rennison

6 January 2015

An invited audience of some of the UK’s most influential finance directors and financial thinkers were present at a recent Finance Director Europe dinner to hear from Mark Rennison, finance director of Nationwide, as to how the world’s largest mutual financial institution has fostered innovation to drive long-term value.

The recent Finance Director Europe event, held at the Andaz Hotel in London's Liverpool Street, opened with a question posed by Steve Dunkerley: "What is innovation through the lens of the finance director (FD)?"

The cost and risks associated with being innovative often have an FD taking a back seat or shooting down new ideas, but, according to Dunkerley, FDs are increasingly getting involved as "innovation business partners" to help ensure a company remains competitive, effective and relevant in the long term.

Expanding on this in the introductory address was Barend van Doorn, head of continental Europe and financial services for Genpact, who looked at the growing importance of innovation in the context of corporate longevity and survival.

"I recently read an article in which it essentially argued that innovation was strongly correlated to the life existence of companies," he said.

He then asked those present what they thought the average lifespan of a company in the early 20th century was.

"The answer is 120 years," he answered. "Then, in the 60s, they did another survey, which revealed that the average lifespan of a company was reduced significantly to approximately 60 years. And then, two years ago, they ran the survey once more and the number had dropped to ten to 12 years. So that means that companies don't live that long any more due to rapidly changing market conditions."

After ten to 12 years, companies do not necessarily disappear; they cease within their current existence, because they get merged, taken over or have to stop their activities due to bankruptcy or regulatory reasons. So what can today's business do to ensure they aren't preparing obituaries after just a decade? What can they do to protect themselves against obsolescence?

"That, then, has been the challenge facing the finance team at Nationwide – harnessing innovation within a heavily regulated, slow moving and traditionally quite staid sector."

To approach an answer, van Doorn used the example of GE, now one of the world's oldest companies, but still one of its most innovative. How has it achieved that longevity? "What it says is 30-40% of your revenue should come from products and services that you have launched in the past three or four years," he said.

But, he added, despite GE's strength and size, its commitment to innovation is neither a cause nor effect of market share. "Innovation has never been about being the biggest," van Doorn said.

"Everybody talks about market share being critical; you will see that huge companies like AT&T and IBM are seeing revenues declining, along with profits."

Instead, van Doorn believes the cause of this is the tendency of large, dominant market leaders to resist change and rely on established techniques. Not, he argued, a scenario likely to allow innovation to flourish.

The key to many years

These are salutary words and certainly a sentiment that Mark Rennison would recognise. As the finance director of a business that can claim a lifespan of 168 years (and counting), Rennison has a venerable institution trusted by millions of savers and mortgage holders under his care, and he's also working in one of the most heavily regulated sectors - one that still reverberates to the shockwaves of the banking crisis six years ago. Innovation in financial services, it is fair to say, is something of a dangerous concept.

It's a point Rennison recognised. "As you may know, 70-80% of Nationwide's business is mortgages and savings, and I think most will realise that those products have been around for quite a while," he continued.

Indeed, Nationwide has 15 million members and customers, and has a relationship with about one in four households in the UK. Added to that, it has 17,000 employees working across the UK in approximately 700 branches. By size, it is the second-biggest household-savings provider in the UK and third-biggest mortgage provider. Its share in those markets is approximately 11%; added to a 6% share of the personal current-account market.

So how revolutionary or innovative can the FD of such a business truly be? "Innovation in this context is not really game changing or revolutionary - it's evolution," Rennison told the guests.

"It's about evolution in the way that finance supports business strategy. That's the way we look at it at Nationwide. And that is because we are operating in a marketplace that is increasingly driven by consumers, social media and, something we talk a lot about at Nationwide at the moment, the digital agenda."

Sign of the times

Rennison explained that added to the rapid pace of change in the ways customers interact with their financial services providers is the "tsunami of regulation" that is still engulfing the industry.

"The length of our reported accounts has grown by more than 50% in the past four years from 175 pages to 270 pages, and that's as a result of things like the enhanced disclosure task force and the requirement for annual reported accounts to be 'fair, balanced and understandable'," he said.

"That has been the challenge facing the finance team at Nationwide – harnessing innovation within a heavily regulated and slow-moving sector."

"It's that level of change, often with short delivery timescales, that leads me to conclude that what we're talking about is no longer continuous improvement. Rather, it demands a more disruptive or urgent response that necessitates a more innovative approach."

That, then, has been the challenge facing the finance team at Nationwide - harnessing innovation within a heavily regulated, slow-moving and traditionally quite staid sector. Yet, the FD was keen to share the ways in which his finance team had broken free of inertia to deliver genuine change and, by doing so, maintained Nationwide's leading position.

Capital investment

Core capital deferred shares (CCDS) may not be a familiar term to everyone, but to Rennison, it represents the very best of finance-driven transformation. As a mutual, he explained, Nationwide doesn't have access to the capital markets in the way a plc or bank would. "Most of our capital is funded through retained earnings, and modest amounts of debt capital in the pre-crisis environment were funded through PIBS," he stated.

A regulatory change - and the need to significantly improve capital ratios - meant that Nationwide faced a challenge to access qualifying capital to fund itself. The result would turn out to be CCDS, a solution designed and developed in house by the finance team at Nationwide that not only satisfied regulators but also allowed the business to retain its mutual status, with all its abiding principles.

"From our point of view, those principles were very important in terms of continuing a business that still looked and felt like a building society, and still did for its members what the building society movement has always done for its members, but it was quite a challenge," he added.

The CCDS solution - a new instrument with no precedent - wasn't an easy sell to investors, and challenged the ingenuity of the finance team "because it was a new instrument where there were no real precedents to work with and the resulting document needed to set all the parameters associated with CCDS, from voting and distribution rights, pricing to tax investment and legal form," Rennison said.

Ultimately, finance delivered. CCDS was admitted to the London Stock Exchange on 3 December 2013. "Through this whole process, the finance team at Nationwide really led the change. It was a multiyear project; it was strategically a top-three project for the organisation in terms of ambition, and that was in the sense that without it, our future strategy was going to be seriously constrained," he continued.

Success factor

So what did Rennison think were the two principal factors in the success of the project? What gave birth to the innovation, and why did it succeed? "First there was a clear and compelling need to create a new capital instrument," he reflected. "At Nationwide, we believe very strongly in the mutual model, but to be able to continue with our business plan into the post-crisis world, we had to find this new solution, and that proves the adage that necessity is indeed the mother of invention.

"CCDS not only satisfied regulators but also allowed the business to retain its mutual status, with all its abiding principles."

"The second factor centres on the response. When we were faced with what were some quite significant and seemingly unresolvable issues, the business response was to keep battling through. So there was an actual drive and that was in large part responsible for the successful outcome of the project. There were many opportunities when we could have stopped the project, but the team that I led never gave up; [they] always felt that they could do it. But I'm not sure that the organisation would have felt that five or six years earlier, pre-crisis."

But it's not only market-led innovation. Rennison was keen to illustrate the changing role of finance within the business.

The enthusiasm with which business gurus, consultants and journalists has fastened on to the possibilities of business partnering, and harnessing finance's insight and skill into other areas of the organisation, is well documented. In practical terms, however, delivering that has proved beyond most firms.

Rennison, though, was able to demonstrate that the Nationwide finance function has, for some time, been a pivotal supporter of innovation and change. He cited the example of the mutual's decision to update its 25-year-old current account, which had changed little since its launch. This would have been fine; only the effort - involving several hundred million pounds in investment - was just beginning as the financial crisis hit.

"The easiest decision at the time would have been to suspend that project to deliver the new banking platform, but that would have carried substantial consequences for our ability to compete effectively going forward," Rennison recalls.

"Our own financial performance, at that time, was coming under significant pressure. So, the obvious thing for finance to do at that stage was to urge caution, exert control and close down all forms of discretionary spending, and, to be clear, that's what we were doing elsewhere within the business in relation to other options.

"However, I am proud to look back on the role that the team that I lead played in supporting a brave decision to launch what was a strategic project that was critical to the long-term viability of the society."

In Rennison's telling, while prudent management is critical and is what finance functions generally are very good at, it needs to be blended with the confidence to see strategic opportunities and to create the financial headroom to pursue them.

"Ultimately, strategic failure is just the same as financial failure; it just happens a bit slower," he concluded.

Confronting the customer challenge

In the Q&A session, Rennison was asked about how Nationwide is innovating in its response to changing customer habits in how they want to interact with their bank.

"Well, we are mostly focused on two things," he began to answer. "One is mobile and digital, and the shift in channels through which these transactions are flowing, and the speed of change there. The other thing we're looking at is the future of the branch network. I've found that when we say that, people jump to the view it is coded language for 'shut down your branch network and put the whole thing on the internet'.

But, given the direction of regulation is towards a predominantly advisory regime, our branches will become great opportunities for customers to access that advice, and it is going to be all about service investment in the branch network to allow that to happen.
So, for example, we have something that we call Nationwide Now that is, broadly speaking, putting interactive video conferencing facilities effectively into our branch network to allow customers to go in and arrange mortgages and some other complex stuff by talking to central teams based in Northampton or Swindon, UK.

There are enormous advantages in terms of curing bottlenecks within the network as well as consistency, quality and, therefore,
level of compliance with the service that they receive. It also brings advantages in terms of structured data that allows all these calls to be recorded. So these are really significant opportunities in terms of the service that we provide."

Mark Rennison was appointed group finance director for Nationwide Building Society in February 2007. He is accountable for financial performance and external reporting, tax, treasury, corporate development and parts of the commercial lending business.
Barend van Doorn, head of continental Europe and financial services for Genpact, provides the introductory address.
Nationwide is focused on mobile and digital channels and the future of the branch network.